Because they’re investing in family-owned, blue-collar service companies, the transaction Huron Capital Principal Cale Kaczmarek does with the founder and owner of such a business is the only one that owner will ever go through. And because of that, he says process, set up, timeline and expectations are important to get started and make sure that everyone's expectations are aligned.
“At the beginning, we talk to the owner about what the process is going to look like, what every step along the way is, what the timeline is,” Kaczmarek said at the 2024 Detroit Smart Business Dealmakers Conference. “And then also we line up all of our third parties around how are they going to do their third-party diligence, how are they going to interact with the owner of the business, any resources that they need to bring in. Something that we usually recommend is if it's a single-family owner, and they have basically a controller who runs the finances of the company, we’ll often recommend bringing in an outsource FP&A (financial planning and analysis) consultant or something to help with the process. And so those types of process setups really help with managing expectations, making sure nobody's misaligned and really make sure it goes smoothly. It never perfectly goes smoothly, but if you can get ahead of any bumps, that's a big thing for us in making things go smoothly.”
While they don’t use reps & warranty insurance on every deal, they have deployed it particularly on large deals, especially those involving an investment banker who will often push for a policy because of the buyer benefits. But there are also seller benefits given the lack of holdbacks on proceeds. He says they’ve been using it a lot more over the past 10 years, with more of an uptick in the past five years, because people are more aware and advisers are pushing for it a lot more.
“We always require it when we're selling our businesses and ultimately exiting to, usually, a another larger private equity firm that's going to take it to the next level,” he says. “And then there's times where it's a small business and we don't really use it — like a $500,000 EBITDA business. It's a pretty straightforward process, the purchase agreement is pretty clean, there's not a lot going on with the operations. We’ll typically try to push for just a standard escrow in that in that case. And then anytime we've done a couple cross-border deals in Europe, one that I worked on in the facility services space, and over there, it's standard.”
He says it’s more often used when it’s important to the seller and what they care about. Sometimes a seller would prefer to have a quicker process that doesn't include involving an insurer to do the full bring-down calls and all the third-party group calls and things that are required that can bring a markup of the policy and a cost.
Cyber, he says, is always a hot topic these days, and something that’s come up across their portfolio and companies. Generally, however, he says their view is that those are never really deal killers. The focus is more on the plan for post-close, how to right-size the organization and get the processes and everything set up in a way that he feels secure.
Much of the time is spent around the labor side of the house, such as doing I-9 verifications. Labor, he says, has become more of a topic every year, especially in light of the shortage of skilled labor in the in the commercial services space. So, they spend a lot of time on upfront on that.
“It used to be a more of a legal, check the box at the end, and it's probably one of our first questions these days,” Kaczmarek says. “So, that's just one thing that's changed quite a bit.”
Still, cyber can be a disruptive issue. In one deal, he had signed the LOI and the very next morning the company was hit with a ransomware attack. The company shut down their systems and lost six months of financial data. He says the deal limped along as they tried to consummate, but didn't work out until a year and a half later.
